>U.S. BANKS (CITI)

DEALING WITH STRESS

■ The day is finally here — At 5pm today, the Fed will officially release hypothetical credit losses and required capital additions (if applicable) for each of the 19 banks that participated in the Government’s stress test. The banks will have until June 8th to develop a plan to address any capital shortfall and they will be required to implement their plan by November 9, 2009.

■ Capital shortfall might result in some TRUP dividend suspensions — In a press release issued last night, the Gov’t listed several actions that the banks’ plans could include to address any capital shortfall. We were surprised that the Gov’t mentioned that plans “should include...waivers and suspensions on preferred securities including trust preferred securities” among possible steps.

■ TRUPs are debt, in our view — We view trust preferred securities (TRUPs) as junior-subordinated debt, so we believe that a suspension of TRUP dividends could have a negative impact on a still-fragile debt market. Non-cumulative equity preferreds are a different story, in our opinion. We have expected Bank of America (Deteriorating, Low Risk) and Wells Fargo (Deteriorating, Low Risk) to suspend dividends on non-cumulative equity preferreds.

■ The Government clarified a precondition of TARP repayment — To repay TARP, banks must be able to issue non-guaranteed debt, with a term greater than five years, in amounts sufficient to satisfy funding needs. (So doing one nonguaranteed deal would not suffice, we believe). Although the bond markets have improved recently, it is not yet clear how many financial institutions could successfully tap the markets to satisfy all of their long-term funding needs outside the Temporary Liquidity Guarantee Program.

■ Minimum capital ratio — The Government will require a Tier 1 common ratio of at least 4% at the end of 2010, under its “more adverse” scenario. Tier 1 common is Tier 1 capital less hybrids and preferreds, so it is similar to tangible common equity (TCE). This is a somewhat easier target, because unrealized losses are not deducted from Tier 1 common, while they are from TCE.

■ Capital shortfall details leaked — Based on press reports, the Government’s stress tests could indicate capital shortfalls at Bank of America ($34 billion), Wells Fargo ($13-15 billion) and at least five others. Press reports have also indicated that several banks under our coverage will not need additional capital: American Express, Capital One, Goldman Sachs and JPMorgan.

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